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The Effect of Discounting on Policy Choices in Inflation Targeting Regimes

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  • SGB Henry
  • Mathan Satchi
  • David Vines

Abstract

This article assesses the implications of discounting on a result derived by Bean (1998): that in a model of monetary policy where policy acts with a lag, the outcomes of monetary policy are very similar for a wide range of preferences of the monetary authority with respect to inflation and output stability. We show that when the authority discounts the future, outcomes become more sensitive to its preferences, and that it is important to take the discount rate into account when examining the question of how the authority's remit should be specified. Copyright 2006 Royal Economic Society.

Suggested Citation

  • SGB Henry & Mathan Satchi & David Vines, 2006. "The Effect of Discounting on Policy Choices in Inflation Targeting Regimes," Economic Journal, Royal Economic Society, vol. 116(508), pages 266-282, January.
    • Handle: RePEc:ecj:econjl:v:116:y:2006:i:508:p:266-282
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    References listed on IDEAS

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    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
    2. Nicoletta Batini & Edward Nelson, 2001. "The Lag from Monetary Policy Actions to Inflation: Friedman Revisited," International Finance, Wiley Blackwell, vol. 4(3), pages 381-400.
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    15. Richard Mash, 2004. "Optimising Microfoundations for Inflation Persistence," Economics Series Working Papers 183, University of Oxford, Department of Economics.
    16. Tatiana Kirsanova & Mathan Satchi & David Vines, 2004. "Monetary Union: Fiscal Stabilisation in the Face of Asymmetric Shocks," Money Macro and Finance (MMF) Research Group Conference 2004 86, Money Macro and Finance Research Group.
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    Cited by:

    1. Tatiana Kirsanova & Sven Jari Stehn & David Vines, 2006. "Five-Equation Macroeconomics A Simple View of the Interactions Between Fiscal Policy and Monetary Policy," Discussion Papers 0610, University of Exeter, Department of Economics.
    2. Charles Bean, 2009. "'The Meaning of Internal Balance' Thirty Years On," Economic Journal, Royal Economic Society, vol. 119(541), pages 442-460, November.
    3. Ali Al-Eyd, 2008. "Ambition versus Gradualism in Disinflation Horizons under Bounded Rationality: The Case of Chile," National Institute of Economic and Social Research (NIESR) Discussion Papers 308, National Institute of Economic and Social Research.

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